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Quarterly report filed by small businesses

10QSB

May 06, 2001

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to ______
Commission file number 001-15673
FRONTLINE COMMUNICATIONS CORPORATION
(Exact name of Small Business issuer as specified in its Charter)
Delaware 13-3950283
(State or other jurisdiction (I.R.S Employer
Of incorporation or organization) Identification number)
One Blue Hill Plaza, P.O. Box 1548, Pearl River, New York 10965
(Address of principal executive offices) (Zip Code)
(845) 623-8553
(Issuer's Telephone Number, including Area Code)
Indicate by a check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes X No___
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As of April 26, 2001 there were outstanding 6,690,607 shares of the issuer's
Common Stock, $ .01 par value.

Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2001
NOTE A- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 (b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. The results for the interim periods are not
necessarily indicative of the results that may be attained for an entire year or
any future periods. For further information, refer to the Financial Statements
and footnotes thereto in the Company's annual report on Form 10-KSB for the
fiscal year ended December 31, 2000. There has been no significant changes in
accounting policies since December 31, 2000.
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NOTE B- LOSS PER SHARE
The Company follows SFAS No. 128, "Earning per Share", which provides for
the calculation of "basic" and "diluted" earning per share ("EPS"). Basic EPS
includes no dilution and is computed by dividing income or loss available to
common shareholders by the weighted - average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur through the effect of common shares issuable upon
exercise of stock options and warrants and convertible securities. Potential
common shares have not been included in the computation of diluted EPS since the
effect would be antidilutive.
NOTE C-CAPITAL STOCK
During the three months ended March 31, 2001 the Company issued 132,940
shares of common upon conversion of 39,100 shares of Series B Convertible
Redeemable preferred stock.
During the three months ended March 31, 2000, additional dividends
(noncash) related to beneficial conversion feature of the preferred stock of
approximately $5,856,000 were recorded as a result of the conversion price of
the preferred stock being less than the market price of the common stock at the
time of the offering.
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M

ANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:
The statements contained herein which are not historical facts are "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934. These
"forward looking statements" are subject to risks and uncertainties, including
but not limited to, risks associated with the Company's future growth and
operating results, the ability of the Company to successfully integrate newly
acquired subscribers, business entities and personnel into its operations,
changes in consumer preference and demographics, technological change,
competitive factors, unfavorable general economic conditions, and other factors
described herein. The Company assumes no obligation to update the forward
looking information. Actual results may vary significantly from the results
expressed or implied by such forward looking statements.
Overview
During 2000 and 2001 a significant part of the Company's revenues were
derived from providing Internet access services to individuals and businesses.
These revenues are comprised principally of recurring revenues from the
Company's customer base, leased line connections and from various ancillary
services. The Company charges subscription fees, which are billed monthly or
quarterly, in advance, typically pursuant to pre-authorized credit card
accounts. The balance of the Company's revenues were derived from website
development and hosting services.
Monthly subscription service revenue for Internet access is recognized over
the period in which services are provided. Fee revenue for website development
and Internet website presence services are recognized as services are performed.
Deferred revenue represents prepaid access fees by customers.
Acquisitions
Acquisitions have historically been an important aspect of the Company's
growth strategy. In 2000, the Company acquired substantially all of the assets
of The PressRoom Online Services, Application Resources Information Services,
Inc d/b/a Way Communications, The First Street Corporation, Wizardnet, Inc.,
Delanet, Inc. (internet access service providers) and PNM Group, Inc., a Web
design company. The Company also acquired certain customers of Double D Network
Services, Inc. pursuant to an agreement whereby the Company paid Double D a
referral fee for each Double D customer who signed up for the Company's dial-up
service.
All of the acquisitions were accounted for using the purchase method of
accounting with the results of each acquisition included in the consolidated
financial statements from the respective acquisition date.
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Restructuring Program.
In November 2000, the Company initiated a restructuring program designed
to, among other things, reduce its operating losses. The program consists of
reductions of personnel, reduction in marketing and promotional expenses,
consolidation of certain operations, exit from certain marginal products lines
not related to the Company's core business, and closure of regional offices.
The Company believes that the restructuring program and related cost
reductions, will permit the Company to maintain service quality to its
customers, while a more focused product offering portfolio will enhance the
Company's ability to grow its revenue base. To date the Company has realized
significant cost reductions and the Company hopes to reduce additional costs in
2001. However, there can be no assurance that the restructuring program will
achieve the desired results and that there will not be any disruption of any
services or resulting loss of revenues.
Results of Operations
Comparison of the three months ended March 31, 2001 and 2000
Revenues: Revenues increased for the three months ended March 31, 2001 by
$754,731 or 80.7% over the same period of the prior year. The increase was
attributable mainly to an expanded customer base due to acquisitions and the
Company's marketing efforts.
Cost of Revenues: For the three months ended March 31, 2001, cost of revenues
increased by $455,147 to $1,047,674 compared to the same period of the prior
year. As a percentage of revenues, cost of revenues decreased to 62.0% from
63.4%. The absolute dollar increase in cost of revenues was due principally to
increased communication and technical personnel expenses incurred to support the
increased customer base.
Selling, General and Administrative: For the three months ended March 31, 2001,
selling general and administrative expenses decreased by $298,859 compared to
the same period of the prior year. As a percentage of revenues, selling, general
and administrative expenses decreased from 166.3% in 2000 to 74.3% in 2001. The
decrease in selling, general and administrative expenses was due to cost
reductions realized through the restructuring program.
Depreciation and Amortization: For the three months ended March 31, 2001,
depreciation and amortization increased by $69,368 to $730,831 compared to the
same period of the prior year. The increase was due to amortization arising from
acquisitions completed in 2000. The increase was partially offset by reduced
amortization resulting from the intangibles written off as impaired in the
fourth fiscal quarter of 2000.
Interest Income: Interest expense net of interest income for the three months
ended March 31, 2001 was $9,100 compared to a net interest income of $54,683 for
the three months ended March 31,2000 because the proceeds of the Company's
public offering of Series B Convertible Redeemable preferred stock has been used
to fund operations.
Net loss: For the three months ended March 31, 2001, net loss decreased by 23.4%
to $1,392,198 compared to a net loss of $1,818,571 in 2000. The Company has
incurred significant losses as revenues generated were not sufficient to offset
the substantial up-front expenditures and operating costs associated with
attracting and retaining additional customers.
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During the three months ended March 31, 2000, additional dividends
(noncash) related to the beneficial conversion feature of the preferred stock of
approximately $5,856,000 were recorded as a result of the conversion price of
the preferred stock being less than the market price of the common stock at the
time of the offering. For the three months ended March 31, 2000 the net loss
after adjusting for the additional dividends and normal dividends for preferred
stock resulted in a net loss of $7,737,815 applicable to common shares.
Liquidity and capital resources.
The Company's working capital deficiency at March 31, 2001 was $1,392,694
compared with a working capital deficiency of $585,196 at December 31, 2000. The
increase in working capital deficiency was mainly due to operating losses.
The Company's primary capital requirements are to install network equipment
and working capital. To date, the Company has financed its capital requirements
primarily through issuance of debt and equity securities. The Company currently
does not have any bank lines of credit. The availability of capital resources is
dependent upon prevailing market conditions, interest rates, and the financial
condition of the Company.
The company's capital expenditures for 2001 are expected to range between
$110,000 to $150,000. Based on the current plans, management anticipates that
cash on hand and expected recurring revenues will satisfy the Company's capital
requirements through at least the end of 2001. However, the Company's need for
additional capital may be affected by the outcome of its effort to reduce
operating expenses as part of its restructuring program. If the Company is not
successful in implementing certain cost cutting measures or if revenues are
below expectations, the Company may need additional financing in 2001 to
continue operations as currently conducted. The Company has no available standby
sources of financing and there can be no assurance that any additional
financing, if required, will be available to the Company on acceptable terms, or
at all.
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PART II
OTHER INFORMATION

Item 1. Legal Proceedings
As reported in the Company's annual report on Form 10-KSB
for the fiscal year ended December 31, 2000, in February 2001,
the Company was served with a complaint filed in the United
States Bankruptcy Court for the Eastern District of Virginia,
Alexandria Division, by Robert O. Tyler, the Trustee in
Bankruptcy for Double D Network Services, Inc. entitled Robert O
Tyler, Trustee of Double D Network Services, Inc. v. Frontline
Communications Corporation. On May 2, 2001, the Company and the
Trustee reached a settlement whereby the Company agreed to pay
$20,000 to the bankruptcy estate. The settlement is subject to
bankruptcy court approval.

Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, the Company filed:
(i) an 8-K for the event dated January 10, 2001 under Item
4 to report changes in its certifying accountant.
(ii) an 8-K for the event dated February 16, 2001 under Item
5 to report the sale of a majority of its equity
interest in iShopNetworks, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 7, 2001
By: /s/ Stephen J. Cole-Hatchard
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Stephen J. Cole-Hatchard
Chief Executive Officer and President
By: /s/ Vasan Thatham
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Vasan Thatham
Principal Financial Officer and
Vice President
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